Preparing to invest
There are few things that can have more impact on your success than taking an early decision to start investing. If you lay the right groundwork first...
Plunging right in there is not necessarily the best way to start with investment. Doing so without any thought could leave you vulnerable and, if you're not careful, end up costing you almost as much as you were trying to save.
In a short series of articles, therefore, we are going to help you get prepared. Called: 'Laying the Groundwork', we will cover 4 different aspects of money that should be dealt with before you even go near an investment.
And this first article is all about you...
First things first
Have you heard of the SWOT analysis? If you have had anything to do with marketing or business strategy, chances are high. But here, I'm going to use if as a guide to aspects of your financial life.
So that you become more aware of your behaviour with money - and can get yourself prepared for whatever life throws at you later.
As we go through these different aspects, the idea is that you list down as many relevant thoughts as you can. The more the better. Because that's how you find out what's important.
And no answers are wrong. Everyone is different and your list will be unique to you.
So let's get started...
S is for: Strengths
Your strengths are those behaviours or processes you go through that indicate you are already managing your money well.
Perhaps you, for example:
have existing investment and/or pension plans
are on course to repay a mortgage
routinely using comparison sites to find insurance deals
If you are already doing any of these things, that counts as a positive in your attitude to money. Because it reflects an attitude of respect and an ability to manage it sensibly.
How many more can you think of?
W is for: Weaknesses
Weaknesses are things about you that indicate you might NOT be managing money well. For example:
routinely running credit card debt*
being inclined to regularly overspend
finding it impossible to just window shop
falling for deals you don't need or
spending unconsciously - on coffee you don't drink, for example
If you are inclined to any of the above, please don't start beating yourself up. There are many reasons for them. However, if this process can help you identify them, you can then start to work on curbing them. And if you are in debt, starting to pay it off.
Because, unless you are extremely well off, constant spending hijacks your ability to keep tabs on your money and means that you are very likely wasting it. For example, on high interest payments or on food that's thrown away.
(In fact, even if you are very wealthy, that doesn't mean you are immune to debt. The scale of the spending (and debts) simply get larger.)
Weakness is not always about overspending. At the other end of the scale, there is the hoarder. By which I mean the type of person who earns twice what you do, saves every penny, has a huge fund of money built up in the bank - but still feels the need to save more.
Sensible management of your money is a great attribute - but if it gets to the point where you are missing out on fun experiences - life - simply for fear of loss, that can be just as much of a problem.
O is for: Opportunities
These are the things that are waiting for you to just make the move and they would improve your situation dramatically.
Some will be straightforward: for example:
can you reduce your energy bills?
are you paying for a current account?
could you move your savings to get a higher interest rate?
Others might be easy to see but take a bit longer:
switch your insurance at renewal,
pay off a costly credit card debt.
The list of opportunities you come up with is essentially your first to do list.
T is for: Threats
Threats are those things which could take you by surprise. Like:
the roof falling in
unexpected changes to personal or work life.
These are the things which we don’t obviously worry about each day but which, when and if they do happen, can have a significant impact on our finances. In essence, they are the reason we all recommend building a small emergency fund, or why we buy insurance.
The key here, though, is to try and make you think about whether any potential threats can be faced up to now. And face up to them before you make any longer term decisions...
should you replace the washing machine before it floods the place?
are you prepared for, could you even take advantage of, redundancy should that ever become a possibility?
do you need contingency to cover you in the event of unexpected ill health?
Sound sensible? If you can write all these things down, it gives you an opportunity to consider your behaviours, piggy back all the positive aspects and then neutralise or at least minimise the potential downsides of the negatives.
If you can do all that, you are in great shape for investment. And you'll have yourself the basis for a plan.
(Which, if you've not already started, might means it's time to actually start building one...)